You have made yourself the trustee for those in every country who seek to
mend the evils of our condition by reasoned experiment within the framework of
the existing social system. If you fail, rational change will be gravely
prejudiced throughout the world, leaving orthodoxy and revolution to fight it
out. But if you succeed, new and bolder methods will be tried everywhere, and we
may date the first chapter of a new economic era from your accession to office.
This is a sufficient reason why I should venture to lay my reflections before
you, though under the disadvantages of distance and partial knowledge. ...

You are engaged on a double task, recovery and reform - recovery from the
slump and the passage of those business and social reforms which are long
overdue. For the first, speed and quick results are essential. The second may be
urgent too; but haste will be injurious, and wisdom of long-range purpose is
more necessary than immediate achievement. It will be through raising high the
prestige of your administration by success in short-range recovery, that you
will have the driving force to accomplish long-range reform. On the other hand,
even wise and necessary reform may, in some respects, impede and complicate
recovery. For it will upset the confidence of the business world and weaken
their existing motives to action, before you have had time to put other motives
in their place. ...

My second reflection relates to the technique of recovery itself. The object
of recovery is to increase the national output and put more men to work. In the
economic system of the modern world, output is primarily produced for sale; and
the volume of output depends on the amount of purchasing power, compared with
the prime cost of production, which is expected to come on the market. Broadly
speaking, therefore, an increase of output depends on the amount of purchasing
power, compared with the prime cost of production, which is expected to come on
the market. Broadly speaking, therefore, an increase of output cannot occur
unless by the operation of one or other of three factors. Individuals must be
induced to spend more out of their existing incomes; or the business world must
be induced, either by increased confidence in the prospects or by a lower rate
of interest, to create additional current incomes in the hands of their
employees...; or public authority must be called in aid to create additional
current incomes through the expenditure of borrowed or printed money. In bad
times the first factor cannot be expected to work on a sufficient scale. The
second factor will come in as the second wave of attack on the slump after the
tide has been turned by the expenditures of public authority. It is, therefore,
only from the third factor that we can expect the initial major impulse.

Now there are indications that two technical fallacies may have affected the
policy of your administration. The first relates to the part played in recovery
by rising prices. Rising prices are to be welcomed because they are usually a
symptom of rising output and employment. When more purchasing power is spent,
one expects rising output at rising prices. Since there cannot be rising output
without rising prices, it is essential to ensure that the recovery shall not be
held back by the insufficiency of the supply of money to support the increased
monetary turn-over. But there is much less to be said in favour of rising
prices, if they are brought about at the expense of rising output. Some debtors
may be helped, but the national recovery as a whole will be retarded. Thus
rising prices caused by deliberately increasing prime costs or by restricting
output have a vastly inferior value to rising prices which are the natural
result of an increase in the nation's purchasing power.

The set-back which American recovery experienced this autumn was the
predictable consequence of the failure of your administration to organise any
material increase in new loan expenditure during your first six months of
office. The position six months hence will entirely depend on whether you have
been laying the foundations for larger expenditures in the near future.

I am not surprised that so little has been spent up-to-date. Our own
experience has shown how difficult it is to improvise useful loan-expenditures
at short notice. There are many obstacle to be patiently overcome, if waste,
inefficiency and corruption are to be avoided. There are many factors, which I
need not stop to enumerate, which render especially difficult in the United
States the rapid improvisation of a vast programme of public works. But the
risks of less speed must be weighed against those of more haste.

The other set of fallacies, of which I fear the influence, arises out of a
crude economic doctrine commonly known as the quantity theory of money. Rising
output and rising incomes will suffer a set-back sooner or later if the quantity
of money is rigidly fixed. Some people seem to infer from this that output and
income can be raised by increasing the quantity of money. But this is like
trying to get fat by buying a larger belt. In the United States to-day your belt
is plenty big enough for your belly. It is a most misleading thing to stress the
quantity of money, which is only a limiting factor, rather than the volume of
expenditure, which is the operative factor. ...

If you were to ask me what I would suggest in concrete terms for the
immediate future, I would reply thus.

In the field of domestic policy, I put in the forefront, for the reasons
given above, a large volume of loan-expenditures under government auspices. It
is beyond my province to choose particular objects of expenditure. But
preference should be given to those which can be made to mature quickly on a
large scale, as for example the rehabilitation of the physical condition of the
railroads. The object is to start the ball rolling. The United States is ready
to roll towards prosperity, if a good hard shove can be given in the next six
months.

I put in the second place the maintenance of cheap and abundant credit and in
particular the reduction of the long-term rates of interest. ... I see no reason
why you should not reduce the rate of interest on your long-term government
bonds to 2.5% or less with favourable repercussions on the whole bond market, if
only the Federal Reserve System would replace its present holdings of
short-dated Treasury issues by purchasing long-dated issues in exchange. Such a
policy might become effective in the course of a few months, and I attach great
importance to it.

With these adaptations or enlargements of your existing policies, I should
expect a successful outcome with great confidence. How much that would mean, not
only to the material prosperity of the United States and the whole World, but in
comfort to men's minds through a restoration of their faith in the wisdom and
the power of government!

You have made yourself the trustee for those in every country who seek to
mend the evils of our condition by reasoned experiment within the framework of
the existing social system. If you fail, rational change will be gravely
prejudiced throughout the world, leaving orthodoxy and revolution to fight it
out. But if you succeed, new and bolder methods will be tried everywhere, and we
may date the first chapter of a new economic era from your accession to office.
This is a sufficient reason why I should venture to lay my reflections before
you, though under the disadvantages of distance and partial knowledge. ...

You are engaged on a double task, recovery and reform - recovery from the
slump and the passage of those business and social reforms which are long
overdue. For the first, speed and quick results are essential. The second may be
urgent too; but haste will be injurious, and wisdom of long-range purpose is
more necessary than immediate achievement. It will be through raising high the
prestige of your administration by success in short-range recovery, that you
will have the driving force to accomplish long-range reform. On the other hand,
even wise and necessary reform may, in some respects, impede and complicate
recovery. For it will upset the confidence of the business world and weaken
their existing motives to action, before you have had time to put other motives
in their place. ...

My second reflection relates to the technique of recovery itself. The object
of recovery is to increase the national output and put more men to work. In the
economic system of the modern world, output is primarily produced for sale; and
the volume of output depends on the amount of purchasing power, compared with
the prime cost of production, which is expected to come on the market. Broadly
speaking, therefore, an increase of output depends on the amount of purchasing
power, compared with the prime cost of production, which is expected to come on
the market. Broadly speaking, therefore, an increase of output cannot occur
unless by the operation of one or other of three factors. Individuals must be
induced to spend more out of their existing incomes; or the business world must
be induced, either by increased confidence in the prospects or by a lower rate
of interest, to create additional current incomes in the hands of their
employees...; or public authority must be called in aid to create additional
current incomes through the expenditure of borrowed or printed money. In bad
times the first factor cannot be expected to work on a sufficient scale. The
second factor will come in as the second wave of attack on the slump after the
tide has been turned by the expenditures of public authority. It is, therefore,
only from the third factor that we can expect the initial major impulse.